SAIM2040 - Interest: when does interest run?

Interest cannot be back-dated

Since interest on a loan or debt can normally only run where there is an agreement to pay interest ( SAIM2030), it follows that interest cannot be back-dated.

Example

Deborah is a controlling shareholder in Deb’s Fashions Ltd. When the company started in 2001, she made a loan of £10,000 to the company. There was no agreement in 2001 that the loan should pay interest. In preparing the company accounts for year ended 31 December 2005, the company’s accountant advises that the company can now afford to pay interest, and accordingly it is agreed on 4 February 2006 that the loan will carry interest at 3% per annum.

The agreement will have effect only from 4 February 2006. The company may make a payment to Deborah to compensate her for the period when she received no interest on the £10,000. Such a payment is not interest, even if it calculated on a time basis, or if it is described in the company accounts as ‘interest’. The tax treatment of such a payment will depend on the exact nature of the arrangements between Deborah and the company.